Saturday, December 30, 2023

In Plain Sight - Growing Risk Level in NYCERS Investments and Runaway Fees.

Runaway Investments fees

In FY-2000 NYCERS paid $37.4 million in investment fees for an asset base of $42.8 billion.

In FY-2023 NYCERS paid $489.9 million in investment fees for an asset base of $82.4 billion.

The numbers speak for themselves. There is no benefit to these radically increased fees. Clearly, twice the $37.4 million in fees from FY2000 could cover the $82.4 billion in assets for FY-2023. But the current trustees have no idea what was going on in 2000.

This is a big part of the income inequality in America. This story is not just about NYCERS but every public pension plan in America.

Increasing Investment Risk

In a prior post from January 2020, I outlined a new accounting reporting requirement for government pension plans (GASB 72) mandating that plans report a breakdown of the reliability of the reported value of the plan's investments. The assets are broken down into 3 levels as listed below:

  • Level-1 assets - open market - very liquid
  • Level-2 assets - open market - not as liquid
  • Level- 3 and NAV assets - no open market - not liquid

In addition to these crazy fees noted above, the risky Level-3 assets at NYCERS have grown steadily since 2015. On top of this growth in risky assets, this year there was a law passed in Albany to raise the limit (from 25% to 35%) on the amount of Level 3 and NAV assets in a NYS public pension plan.

In the table below you will see the growth for Level-3 and NAV class assets at NYCERS.

Note: As of FY-2023 NYCERS is relabeling alternative investments as net asset value items rather than Level 3 as a "practical expedient". This is a PR sleight of hand. Nobody wants to be called Level-3. "NAV" is a lot more vague. $19.8 billion (25% of the portfolio) for Level-3 and NAV assets is an obvious red flag for the risk level of the portfolio. You can be sure that $19.8B is the upper bound for this class and that a 50% reduction is a real possibility.

Ranking of NYCERS Assets via GASB 72
Fiscal Year Level-1 Assets (in thousands) Level-2 Assets Level-3 Assets Assets at Net Asset Value Total
FY-2014 $27,028,432 $17,437,139 $10,642,729 $0 $55,108,300
FY-2015 $27,707,076 $17,175,757 $10,796,968 $0 $55,679,801
FY-2016 $27,330,534 $15,924,399 $10,377,791 $1,123,861 $54,756,585
FY-2017 $32,312,375 $17,461,428 $10,914,801 $95,987 $60,784,591
FY-2018 $31,219,885 $23,282,843 $10,880,803 $66,675 $65,450,206
FY-2019 $34,128,310 $22,782,825 $11,534,369 $6,979 $68,452,483
FY-2020 $33,647,567 $24,941,479 $11,856,921 $3,735 $70,449,703
FY-2021 $42,162,979 $30,981,818 $14,845,548 $1,240 $88,091,585
FY-2022 $32,892,068 $26,386,373 $18,726,172 $1,129 $78,005,742
FY-2023 $35,986,966 $25,235,457 $461,156 $19,845,541 $81,529.120

Investment Expenses for the Assets by Quality for FY-2023

In FY-2023 NYCERS paid the following investment management fees for the different levels:

  1. $54.7M for Level 1 assets (FY-2019 fees = $39.7M).
  2. $25.0M for Level 2 assets (FY-2019 fees = $18.4M)
  3. $375.0M for Level 3 and NAV assets (FY-2019 fees = $140.5M)

Again, the numbers speak for themselves. The trustees are being rolled big time - everywhere.

Friday, December 8, 2023

How to Do Investment Fees the Right Way - TRS and Its TDA Fund

TRS is one one the five NYC pension funds, the one that covers NYC teachers. Actually TRS is two funds, a defined benefit fund (DB) and a defined contribution fund (DC). TRS calls its DC fund the TDA Program. The TDA program is funded by payroll deductions (approximately $1.0B/year) from the teachers. This fund is teachers' money, not tax payers' money. Well not really. The DB fund guareantees a 8.25% and 7% rate of return on fixed income assests in the TDA fund. But that is another story for another day.

The following list is the closing balances of the two funds as of June 30th of following years:

  • Year - DB Fund - TDA Fund
  • 2020 -- $59.3B -- $37.0B
  • 2021 -- $78.3B -- $43.0B
  • 2022 -- $64.0B -- $42.2B
  • 2023 -- $67.9B -- $45.4B

You can see from the numbers that the TDA fund runs a tighter ship than the DB fund. The TDA fund grew by 22.7% over the three years while the DB fund only grew by 14.5%. Eeven though the TDA rate of return is is impressive compared to the DC fund, what rally is superhuman is the investment fees that the TDA fund pays versus the DC fund. See the fees for the two funds over the four years listed below:

  • Years - DB Fund - TDA Fund
  • 2020 -- $290.8M -- $0.6M
  • 2021 -- $405.7M -- $13.7M
  • 2022 -- $535.3M -- $24.2M
  • 2023 -- $518.9M -- $11.2M

How does the TDA spend so little on fees and does so much better that the DB fund???

Tuesday, September 26, 2023

Harry Nespoli Fails to File a Final Appeal to Protect the Pension Rights of His Union Members

In January 2017, I wrote a post about how NYCERS was stripping pension rights from Tier 4 members who became sanitation workers after 4/1/2012 based falsely on the new Tier 6 law.

To make this issue simple, Tier 6 does not force Tier 4 members into Tier 6-3 just because the member becomes a sanitation worker and even if it did, it would be unconstitutional.

In November 2016, four and a half years after the passage of Tier 6 NYCERS changed its previous position on this issue and began sending notices to certain Tier 4 sanitation workers that their Tier 4 Sanitation benefits were being revoked and they were being forced into Tier 6-3 Sanitation benefits.

On 11/15/2016 Harry Nespoli filed a complaint in court against the NYCERS Board of Trustees attempting to reverse this blatant attack on his union members' pension rights.

NYCERS Board of Trustees

There are three votes out of seven on the NYCERS Board of Trustees controlled by the three largest city unions. Nespoli was and continues to be head of the MLC, the organization representing all city unions. It is not clear whether Nespoli spoke to the three union reps on the Board of Trustees about this issue. There should have been a full debate about this issue at a board meeting. This would have been the best way of handling this issue and preventing unnecessary litigation.

The Six Other NYS Pension Systems

In addition, there are implications of this issue for the other six NYS pension systems.

For instance, I have a strong suspicion that
a 2008 Tier 4 NYCERS member who joined NYPD in 2013 is covered by Tier 2 police pension benefits and
a 2011 Tier 4 NYCERS member who joined NYPD in 2013 is covered by Tier 3 pre-Tier 6 pension benefits.

This is counter to the NYCERS position.

Trial Court

Four and a half years later, on 6/10/2021, the trial court reached a court decision on this issue. The trail court incorrectly decided that NYCERS was an expert on pension law and confirmed its unfounded actions.

Nespoli appealed the trial decision.

First Department

On 5/5/2022 the First Department Appellate Court upheld (case # 02096-2021) the incorrect trial court decision. It discarded the constitutional pension protection clause with only the following statement which is, on its face, factually incorrect.

Petitioners’ reclassification did not violate the New York State Constitution (NY Const art V, § 7[a]), since “petitioners were never entitled to [SA]-20 benefits to begin with and, thus, did not have a contractual right to those benefits” (Matter of Ly, 189 AD3d at 1413).

In fact, on March 30, 2012, every Tier 4 NYCERS member was eligible to be covered by the SA-20 plan if he or she became part of the Uniform Sanitation Force. The court is saying they did not, in complete denial of reality. What we have here is a blind umpire.

On April 1, 2012, Tier 6 can not take away a pension right that existed on March 30, 2012, the day before. The scary thing about this decision is that there is no rational argument supporting it.

Court of Appeals

There is no record on the court website that Nespoli filed an appeal to the NY Court of Appeals. This is a constitutional issue and there are impacts for the other six NYS pension systems. It is clear that this issue should have been taken to the Court of Appeals.

Of course, this was the same time that the City and the MLC were busy trying to deprive city retirees of their Medicare supplemental health insurance benefits in order funnel the money saved into union welfare funds.

NYS Constitution

The following is the text from the N.Y. Constitution Article V, § 7:

"The rights of public employees are thus fixed as of the time the employee becomes a member of the system. We have consistently held that the constitutional prohibition against diminishing or impairing retirement benefits prohibits official action during a public employment membership in a retirement system which adversely affects the amount of the retirement benefits payable to the members on retirement under laws and conditions existing at the time of entrance into retirement system membership. "
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Saturday, September 16, 2023

Is a New IT System Worth $487M?

In the spring of 2015, NYCERS initiated a five year project (LRP) to modernize its IT systems. It was supposed to cost $132M and take five years.

It is now 2023, and the first phase of the replacement project is still in test. NYCERS has already budgeted $329M as of FY-2024 for the project and is projecting another $158M as of FY-2027, the new end date for the project. That adds up to a total of $487M. NYCERS unfortunately has a track record of underestimating future costs. So we should expect a higher total cost assumimg completion of the project.

The NYCERS budget was $55.2M in FY-2015. If you project a 3% increase every year, the FY-2024 budget would be $72.0M. The actual budget for FY-2024 is $165.9M.

In 2014, the City experienced a runaway IT project, CityTime. You can read the DOI report on the NYC.gov website. Just search for "CityTime" on the website. The LRP project is starting to look a lot like the CityTime project. There is no evidence of corruption but there is a lot to support a conclusion of gross incompetence.

Thursday, September 14, 2023

Mayor Adams Budget Knife and the FY-2024 NYCERS Budget Update

In a June 17, 2022 posting, I outined the history of NYCERS administrative budget.

On June 21, 2023, the NYCERS trustess adopted the FY-2024 admin budget.

It was a 13.3% increase over the FY-2023 budget. See the updated table below. The numbers speak for themselves. I wonder if the trustees are aware of this spending history.

At the same time NYC adopted a FY-2024 budget that was a reduction from $111.2B to $107.7B, a 3.5% cut. To be fair, the FY-2023 budget was originally adopted at $101.1B. What made the Mayor allow NYCERS to increase its budget by 13.3%, while the City's budget was cut by 3.5%?

History of NYCERS Admin Budget 1996-2024
Fiscal Year F/T Count P/T Count College Aides / Hourly PS Budget OTPS Budget Fringe Total % Increase
2024 501 30 16 $54,290,508 $98,040,138 $13,633,903 $165,964,549 13.37%
2023 485 30 16 $43,016,089 $90,436,500 $12,942,144 $146,394,733 7.92%
2022 474 27 16 $38,397,943 $85,531,063 $11,719,465 $135,648,471 37.94%
2021 438 27 16 $36,842,549 $50,210,145 $11,283,945 $98,336,639 7.10%
2020 438 27 16 $35,262,139 $45,862,557 $10,689,350 $91,814,046 4.97%
2019 428 35 0 $33,592,612 $43,532,302 $10,344,565 $87,469,479 39.44%
2018 411350 $31,704,410 $21,832,718 $9,194,015 $62,731,143 3.55%
2017 401350 $31,056,080 $20,916,796 $8,605,288 $60,578,164 4.81%
2016 392350 $30,233,989 $19,407,619 $8,155,517 $57,797,125 4.70%
2015392530 $29,131,972 $18,154,572 $7,915,476 $55,202,020 3.68%
2014383530 $26,813,635 $18,761,240 $7,669,819 $53,244,694 2.18%
2013 380520 $26,623,635 $17,951,822 $7,532,499 $52,107,956 1.93%
2012 372120 $25,756,827 $18,781,428 $6,603,649 $51,122,139 1.14%
2011 372120 $26,046,827 $18,492,228 $6,006,573 $50,545,628 2.76%
2010 372120 $26,046,827 $17,777,228 $5,362,640 $49,186,695 1.88%
2009 371130 $25,189,842 $18,208,861 $4,879,903 $48,278,606 6.22%
2008 371130 $23,597,857 $17,259,313 $4,799,066 $45,656,236 10.80%
2007 364130 $22,616,783 $14,258,471 4,375,788 $41,251,042 5.73%
2006 3421330 $20,255,911 $14,683,855 $ 4,076,823 $39,016,589 1.01%
2005 342 13 30 $19,737,687 $14,851,355 $3,887,624 $38,476,666 1.2%
****
1996 154030 $6,199,709 $2,573,715 na $8,773,424 5.93%

Monday, September 4, 2023

Why is the NYCERS Retirement Option Letter Taking 12 Months?

At the July 2023 NYCERS Board meeting NYCERS staff briefed the Trustees that the lead time for retirement option letters (see below) was 12 months. This is a big service problem.

I’ve previously posted about this problem in December 2019 when the lead time was six months as opposed to the target of 3 months. The NYCERS budget was $62.7M in FY-2018. It was $146.4M in FY-2023.

How did this problem become worse?

NYCERS has become devoured by an out-of-control IT project and has lost focus on providing service to members and retirees.

As reference, below is a chart of the NYCERS admin budget since 2018

NYCERS Staff and Budget FY-2018 to FY-2024
Year Full Timers Part Timers Temp-Hourly PS Expenses OTPS Expenses Fringe Expenses Total Expenses
2018 415 35 0 $31.7 $21.8 $9.1 $62.7
2019 428 35 0 $33.6 $43.5 $10.3 $87.5
2020 438 27 16 $35.3 $45.9 $10.7 $91.8
2021 474 27 16 $36.8 $50.2 $11.3 $98.3
2022 483 30 16 $39.5 $84.5 $11.8 $135.8
2023 485 30 16 $43.0 $90.4 $12.9 $146.4
2024 501 30 16 $54.3 $98.0 $13.8 $165.9

Retirement Option Letter

When a NYCERS member is planning to retire, he/she usually visits the customer service center on Jay Street in downtown Brooklyn around 60 days before his/her retirement date. He/she files a retirement application and sits with NYCERS staff person to be briefed on the procedure.

One of the things the NYCERS agent does is give the member a printed estimate of the member's "maximum" retirement benefit amount along with reduced amounts for option selections for a given beneficiary. The estimate, however, is not adequate to allow a member to make an informed option selection.

Choosing an option rather than a maximum benefit allows a member to leave continuing benefit to a designated beneficiary after the member dies.

With a maximum choice NYCERS stops payment of the full benefit amount when the retiree dies. If the member chooses one of the option amounts, NYCERS will continue to pay a benefit to the beneficiary that the member designated when he/she picked an option choice.

This maximum/option election occurs after the member receives the final option letter. The members have 60 days after the date of the letter to make his/her choice. Currently, NYCERS is informing members that it will take about twelve months for NYCERS to send the member a final option letter on the annual retirement benefit along with the reduced amounts associated with option benefits that member can select in place of the full benefit.

As of 2005, NYCERS was quoting a three-month period for sending a final option letter to members who were retiring.

Wednesday, July 26, 2023

Court Stay for Retirees Fighting the City's Medicare Advantage Scam

On July 7, 2023, the trial court issued a stay stopping the City from terminating Medicare supplemental insurance, Senior Care, for 139,442 city retirees on Medicare and their estimated 50,000 spouses. As part of the termination the City is jamming these retirees and their spouses into a private Medicare Advantage insurance plan offered by Aetna.

The following is a reported response to the stay from the Mayor:

Mayor Eric Adams’ office said the city is considering appealing the injunction. “We are extremely disappointed by this misguided ruling,” it said in a statement. “The city’s Medicare Advantage plan, which was negotiated in close partnership with the Municipal Labor Committee, improves upon retirees’ current plans, including offering a lower deductible, a cap on out-of-pocket expenses, and new benefits, like transportation, fitness programs, and wellness incentives. Further delay in implementing it will only cause greater uncertainty for our retirees and have a detrimental impact on our city’s budget.”

The statement is at best misleading. The mayor and the Municipal Labor Committee did collude to deprive Medicare eligible retirees of health benefits that have been in place since 1966 since the start of Medicare. The fight over which plan is better is something that the Mayor wants to ignore. The alleged new benefits are not important when compared to access to quality health care, especially when you have serious health issues. The further delay that the mayor is worried about is not a delay but a very real hope that the retirees will keep their health benefits. As I have outlined below the just adopted City budget has sufficient funds allocated to cover the cost of Senior Care for Medicare eligible retirees.

As reported by the actuary in his FY-2022 OPEB report, there are a total of 246,832 city retirees with

  • 73,601 (plus 46,510 spouses) who are not eligible for Medicare and
  • 173,231(plus 61,646 spouse) who are eligible for Medicare.

When you subtract the 139,442 retirees covered by Senior Care, you are left with 33,789 Medicare eligible city retirees who have elected private health insurance via Medicare Advantage contracts between CMS, the federal Medicare administrator, and private insurance companies. As of January 1, 2022, the City is essentially no longer paying anything for Medicare Advantage contracts (monthly COBRA rate is $7.65). It is not clear why.

The City is currently paying $204.10/month per person for the Senior Care supplemental coverage. (The COBRA premium is $208.18/month).

That adds up to $464M per year - ((139,442 retirees + estimated 50,000 spouses)*$204.10*12).

Note: The Health & Hospitals Corp. and the Housing Authority have 20,205 retirees covered by Medicare supplemental coverage and would have saved money if the termination had gone into effect on Sept. 1, 2023

On June 30, 2023, the City Council adopted the NYC budget for FY-2024. The Mayor had asked for $2.959B for retirees’ health insurance and $5.64B for workers’ health insurance. The final budget cut the retiree health insurance appropriation by $500M down to $2.459B, what appears to be a ballpark number for the Medicare supplemental cost.

As reference, the adopted budget has the following allocations for health insurance:

  • Workers $5.644 billion
  • Retirees $2.459 billion

Note: The monthly cost for employees and non-Medicare eligible retirees

  • without dependents is $923.67, and
  • with dependents it is $2,265.67.

Note: The adopted budget also includes

  • $896 million for employee welfare fund benefits and
  • $449 million for retiree welfare fund benefits.

Just for the reord, that is a total of $9.4 billion for health insurance and welfare benefits for workers and retirees.

Enough Money for Senior Care

The retiree health insurance costs for FY-2024 based on retiree and spouse counts from the actuary’s June-2022 OPEB report breaks down as follows

  • Non-Medicare retirees $1.565 billion
  • Medicare retirees $0.464 billion
  • Part B refunds for Medicare retirees $0.465 billion

The total of these three amounts is $2.494, very close to the $2.459B amount in the adopted budget. It appears that the adopted budget has enough money to pay for the Medicare supplemental coverage for the 139,000 plus Medicare retirees and their spouses, as if the City knew that it was going to have trouble in court.

The Mayor’s initial $500 million request and its final cut seems to have no rationale.

What these numbers show is that the Medicare with Senior Care is the most economical part of the health insurance program for City workers and retirees. In addition, Medicare with Senior Care is the most effective part of that health coverage.